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ANZ Australian
n Equities Cap
pital
Portffolio
March 2017 Quarterlyy Report
Portffolio objjective
The ANZ
Z Australian Equities Cap
pital Portfolio
o (‘the Portfo
olio’) is focused on identtifying and in
nvesting
in Australian companies that pro
ovide capita l growth to shareholders
s
s with the ai m of genera
ating a
superiorr price return
n when compared to the
e S&P/ASX 100 Share Price Index ov
ver the medium to
long term. The Portffolio is a con
ncentrated p
portfolio inve
esting directly in 30 – 50
0 companies from
the top 100 ASX listted securities. However, the Investm
ment Manage
er may invesst outside th
he top
100 com
mpanies if it is considered appropriatte.
Over the
e long term, the investm
ment objectiv
ve of the Porrtfolio is to outperform
o
in
nflation, as
measure
ed by CPI, by 5% per an
nnum (before
e tax and affter fees) ove
er rolling 10
0-year period
ds. In
the med
dium term, the Portfolio aims to gen erate capital growth tha
at exceeds th
he S&P/ASX 100
Price Ind
dex.
The Porttfolio is desig
gned as a co
ore investme
ent offering with a qualitty overlay an
nd long-term
m focus.
It is stru
uctured to ha
ave defensiv
ve character istics in orde
er to preserv
ve capital ass much as po
ossible in
challeng
ging market conditions with
w
a focus o
on larger capitalised stocks. This alsso means that the
Portfolio
o will not cap
pture the performance o
of the more speculative
s
and
a
volatile p
part of the market,
m
particula
arly in a stro
ongly rising market.
m
In t he longer te
erm, the real investmentt objective is
s to
produce
e returns abo
ove inflation plus a marg
gin. In the sh
horter term, we use the broad share
e market
index as
s a proxy forr measuring investment performance, but expec
ct differencess between th
hat and
the Porttfolio depend
ding on mark
ket condition
ns.
Perfo
ormance
e summ
mary
1 CPI datta is as at Dec
cember 2016. Source: Rese
erve Bank of Australia
A
2 Inception date is 1 November
N
200
08
ve performanc
ce is based up
pon the Model Portfolio. Individual portfolios may diffe r from this du
ue to
The abov
factors th
hat include tim
ming of implem
mentation, cassh flows and corporate
c
actions.
The qua
arter maintained momentum from th
he Trump ‘re
eflation’ rally with the S&
&P/ASX 200 hitting
a post G
GFC peak of 5,907 before
e finishing c lose to a six
x year high of 5,864 and posting an
impressive total retu
urn of 5.1% for the quarrter. The twe
elve month return was a
an incredibly
y strong
21%, de
efying most predictions cast
c
twelve months ago as global grrowth stabilissed, Australia
enjoyed an unexpec
cted windfall in national income from
m higher com
mmodity pricces and stren
ngth
across rresidential ho
ousing boostted wealth a
and related building
b
activ
vity.
There w
was plenty off volatility inttra period ass the ASX de
eviated from
m the theme of cyclical
outperfo
ormance aga
ainst bond-se
ensitive stoccks that has prevailed since the US e
election. In the
t
midst off the ASX reporting seas
son, the ‘defe
ensive growth’ stories assumed asce
endancy as
Consum
mer, Financials and the Real
R
Estate se
ectors provid
ded the strongest gains.. Despite me
eeting
expectattions of a big turnaround
d in profits w
with repaired
d balance sh
heets and mu
uch improve
ed cashflow, the
e Materials sector
s
was th
he weakest – a clear illu
ustration of where
w
good n
news was already
priced in
nto the secto
or.
By the e
end of the qu
uarter, Healtthcare was tthe standoutt sector, rally
ying +15.8%
% after conce
erns
that Tru
ump’s impactt across the US health se
ector would not be as to
ough as initia
ally discountted.
Plus 10%
% returns were also realised across the relatively defensive sectors of C
Consumer Sttaples
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and Utilities although the latter sector’s gains were primarily a product of AGL’s strong +21%
gain through its exposure to higher wholesale electricity prices.
The only weakness in the market was in Telecommunications which fell 4.7% as heavyweight
Telstra was downgraded on concerns its growth profile was flat to negative. However, Vocus
rebounded +11.6% after experiencing tough market downgrades over the previous period.
Interest rate-sensitive names across real estate investment trusts (REITs) were very mixed,
leaving the sector flat over the quarter. Commercial/Industrial portfolios performed well while
trusts with meaningful exposure to residential development generally all finished in negative
territory.
Since inception, the Portfolio has outperformed the CPI + 5% benchmark by 1.7% p.a.
on a before fees basis to deliver an annualised return of 8.8% p.a. before fees.
Performance breakdown
The Portfolio returned 4.6% for the quarter.
Within a strong performing quarter some relative value was realised from the cyclical element
embedded in the portfolio’s growth orientation. An overweight position to Health Care boosted
returns, particularly through our high exposure to CSL Limited (+25.4%) and ResMed (+8.6%).
Our next largest sector positions held in Industrials (+2.7%) and Materials (+2.3%) dragged as
both sectors posted subdued performances against the ASX’s 5% return.
More telling was our underweight to Consumer Staples, which rallied 10.1% despite the sector
being deemed a defensive. Wesfarmers (+9.6%), Woolworths Limited (+11.4%) and Treasury
Wine Estates (+15.4%) all performed strongly. While neutrally weighted in Woolworths and
Wesfarmers, not holding Treasury impacted. Our holding in Tegel Group Holdings (-23.1%), a New
Zealand poultry producer, experienced heavy selling due to concerns around continued
supermarket price deflation and a lack of total volume growth in the sector with an expectation
that margin pressures would follow.
Not holding BlueScope Steel (+32.5%) which is seen as a beneficiary of firming Iron Ore and
Stainless Steel prices was a drag. The share price has now doubled over the last twelve months
with momentum pushing the valuation from expensive to arguably very expensive territory.
While our exposure to Transurban Group (+13.1%) and Sydney Airport Holdings (+13.0%)
boosted returns from Industrials, holding Brambles Limited (-23.7%) and Tox Free Solutions
(-8.2%) negated the positive impact. Transurban and Sydney Airport (which had both been
derated harshly by the market as bond proxies) enjoyed a rebound as concerns surrounding the
threat of rapidly rising bond yields abated. Brambles experienced a very harsh market reaction to
news its North American pallets operation was not meeting expectations while Tox disappointed
the market with an earnings miss as unseasonal weather impacted its liquids waste treatment.
Key overweight in Challenger Limited (+13.3%) and Commonwealth Bank of Australia (+6.7%)
helped the sector make a positive contribution to round out strong absolute performance.
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Portffolio acttivity
The porttfolio is reas
sonably well diversified n
now. Conseq
quently, turnover has bee
en quite sub
bdued as
we awaiit signals forr clearer dire
ection. After rallying hard
d, the cyclica
al element w
within the po
ortfolio
looks tirred, especially across the
e commodity
y plays. Conversely, we are naturall y shy of the high
yielding companies and would not
n expect th
hem to rally in the face of
o generally high global growth
and morre positively sloped yield
d curves.
Activity was restricted to the first half of the
e quarter, where
w
we reduced our ov
verweight position in
Bramble
es to neutral at its first downgraded
d
trading update in Janua
ary. At its ressults briefing
g in
February
y the compa
any walked away
a
from itts longer term
m return tarrgets and the
e stock
subsequ
uently fell a further
f
10%, justifying o
our change in holding. We
W also redu
uced exposurre to
Healthsc
cope on the back of disa
appointing ea
arnings guidance. Early in the quarte
er we sold Sydney
S
Airport tto reduce the portfolio’s exposure to
o bond proxies. Having been
b
well un
nderweight
Insuranc
ce and Diverrsified Financials, we red
duced our ris
sk bet across the sector by introducing
Suncorp
p Group to th
he portfolio.
With turrnover remaining low and careful ba
alancing of re
ealised losse
es and gains,, net realised
d capital
gains arre negligible for the finan
ncial year to
o date. Post-ttax returns will
w be broad
dly in line with pretax returns as a con
nsequence.
Secto
or alloca
ation
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Top 1
10 Portffolio holdings
Macrro Outlo
ook
Although
h the pace of
o global grow
wth is strong
ger, signs ha
ave emerged
d to indicate
e the synchro
onised
lift in glo
obal growth that propelled share ma
arkets higher through 20
016 is now cconsolidating
g at a
solid pac
ce. Inflation has lifted but as the sp ike in energy
y and comm
modity prices roll off the
underlyiing pace of inflation rem
mains modestt across mos
st economies
s. Global fina
ancial condittions
remain s
supportive although
a
we expect that they will like
ely tighten modestly
m
thrrough 2017 due
d
to
continue
ed (though gradual)
g
rate
e rises by the
e US Federa
al Reserve (F
Fed).
The outllook for Euro
ope continue
es to improv
ve, although political risk
ks attached tto the French
h
election could still erode some enthusiasm.
e
We believe this risk has
s now decrea
ased.
The eme
erging markets outlook is also more
e positive due
e to a betterr global grow
wth outlook and
a
a
more sta
able US dollar, but the risk
r
of trade wars and higher US rate
es still hang over these
markets
s.
In China
a, there are clear signs the
t
positive e
hinese stimulus are fadin
ng, increasin
ng the
effects of Ch
likelihoo
od of a slowd
down in the country’s ind
dustrial sector as the pro
operty secto
or cools overr the
latter pa
art of 2017. However, we
w expect th at overall grrowth will remain supporrted as the economy
e
continue
es to transitiion to domes
stic drivers ffrom the industrial secto
or.
With res
spect to Austtralia, wages
s growth cou
uld remain sluggish
s
whic
ch could cau se the RBA to
t keep
interest rates steady
y for an exte
ended period
d of time as wages and inflation
i
fall short of targ
get
levels, a
although this
s needs to be
e balanced a
against contiinued rise in house price
es. Australia is also
more lik
kely to be dirrectly impacted if a sharrper slowdow
wn in the Chinese properrty sector we
ere to
develop.
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Investment Strategy
With significant sector rotation amongst active traders and oscillating performance between
cyclical, defensive, yield orientated and outright growth strategies, we remain fairly neutral across
our sector exposure whilst seeking to retain our bias to growth…albeit at a reasonable price – a
tricky task in a market where momentum of growth names has pushed many into the expensive
range
We also remain cognisant that the cyclical growth element, particularly where reflected in rallying
commodity producers, may have run its course. A fairly neutral exposure in the face of a number
of possible economic and financial market outcomes appears prudent.
In recognition of mounting geopolitical tensions we have also allowed our cash holdings to increase
to approximately 4% as a slightly more defensive stance.
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Disclaimer This information is issued by the Australia and New Zealand Banking Group Limited (ABN 11 005 357 522, AFSL
234 527). The information is current as at 31 March 2017 and is subject to change. The information is general in nature and
does not take into account your personal objectives, needs and financial circumstances. You should consider the
appropriateness of the information, having regard to your personal objectives, needs and financial circumstances. This
information is not to be construed as personal advice, and should not be relied upon as a substitute for professional advice.
Although all the information in this document is obtained in good faith from sources believed to be reliable, no representation
of warranty, express or implied is made as to its accuracy or completeness. Past performance is not indicative of future
performance. The value of investments may rise or fall and the repayment of subscribed capital is not guaranteed.
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